Chapter 6: Deal Structuring
Learning Outcomes
Distinguish between the main types of payment mechanisms used to structure a business combination
Discuss the implications of using a cash transaction during business combinations
Explain the implications of a share transaction during business combinations
Indentify and discuss various defense mechanisms that could be used in an attempt to prevent hostile
acquisitions from taking place]
Introduction
- Ownership of companies must be adjusted to reflect the impact of the transactions
- Merger – shareholders exchange their shares in the companies for shares in the combine company
- Acquisition – acquiring company buys shares in the target company and gains control
- Must determine how much how the payment of the transaction will occur
- Companies can adopt various forms of payment to finance their M&A transactions
- Ranging from issuing shares of new company, assuming target companies debt to cash payment to target
company’s shareholders
SABMiller acquired Molson Coors through a share transaction to form MillerCoors
SABMiller acquired Fosters through a cash transaction
Example
May 2008: Adcock Ingram unbundled from Tiger Brands
March 2013: Bidvest offered to buy 60% of Adcock at R63/share. They gave no guarantees that
they will retain Jonathan Louw's below-par management. Adcock refused to put the offer to
shareholders.
April 2013: Bidvest said it would go hostile with its R6.2bn bid for Adcock, bucking a long history of
friendly acquisitions after being spurned by the drug maker’s board. "Bidvest will engage with
Adcock shareholders" the company said, its clearest statement to date of its intention to bypass
Adcock’s board.
April 2013: Bidvest’s CEO confidently said that their offer would reach Adcock shareholders even if
the target’s board tried every tactic to stop it. Bidvest said in a SENS statement that Adcock’s board
was trying to "frustrate" its offer by using "insubstantial and irrelevant technical issues".
July 2013: A Chilean firm called CFR offered Adcock R73.51/share. The Chileans didn't have their
own people on the ground, which suggests that they would keep Adcock's management. Adcock's
"independent board" liked the offer and entered into "exclusive talks" with CFR. Payment would be
part cash and part shares in the Chilean company
Aug 2013: A private equity company Actis put in a rival offer of R70/share - the draw card being
that 80% of the price would be paid in cash. Adcock did not breath a word of this new bid to its
shareholders.1
“There's every chance that if the board did the democratic thing, some investors might opt for Actis
over CFR. The PIC wants Adcock to remain listed - which it seems it would in some form under Actis'
offer. Equally, asset manager Oasis, which owns 2.3%, says it won't support CFR's bid because it
doesn't want shares in a Chilean company that has lower profit margins, a lower return on equity
and more debt than Adcock.
“Until Adcock's board decides it wants to be transparent with the people who actually own their
company, the terms of these offers are just conjecture. Until then, who can say if CFR's offer is
really first prize, or whether Adcock's board is just protecting an underperforming management
team, rather than looking out for shareholders”.
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Learning Outcomes
Distinguish between the main types of payment mechanisms used to structure a business combination
Discuss the implications of using a cash transaction during business combinations
Explain the implications of a share transaction during business combinations
Indentify and discuss various defense mechanisms that could be used in an attempt to prevent hostile
acquisitions from taking place]
Introduction
- Ownership of companies must be adjusted to reflect the impact of the transactions
- Merger – shareholders exchange their shares in the companies for shares in the combine company
- Acquisition – acquiring company buys shares in the target company and gains control
- Must determine how much how the payment of the transaction will occur
- Companies can adopt various forms of payment to finance their M&A transactions
- Ranging from issuing shares of new company, assuming target companies debt to cash payment to target
company’s shareholders
SABMiller acquired Molson Coors through a share transaction to form MillerCoors
SABMiller acquired Fosters through a cash transaction
Example
May 2008: Adcock Ingram unbundled from Tiger Brands
March 2013: Bidvest offered to buy 60% of Adcock at R63/share. They gave no guarantees that
they will retain Jonathan Louw's below-par management. Adcock refused to put the offer to
shareholders.
April 2013: Bidvest said it would go hostile with its R6.2bn bid for Adcock, bucking a long history of
friendly acquisitions after being spurned by the drug maker’s board. "Bidvest will engage with
Adcock shareholders" the company said, its clearest statement to date of its intention to bypass
Adcock’s board.
April 2013: Bidvest’s CEO confidently said that their offer would reach Adcock shareholders even if
the target’s board tried every tactic to stop it. Bidvest said in a SENS statement that Adcock’s board
was trying to "frustrate" its offer by using "insubstantial and irrelevant technical issues".
July 2013: A Chilean firm called CFR offered Adcock R73.51/share. The Chileans didn't have their
own people on the ground, which suggests that they would keep Adcock's management. Adcock's
"independent board" liked the offer and entered into "exclusive talks" with CFR. Payment would be
part cash and part shares in the Chilean company
Aug 2013: A private equity company Actis put in a rival offer of R70/share - the draw card being
that 80% of the price would be paid in cash. Adcock did not breath a word of this new bid to its
shareholders.1
“There's every chance that if the board did the democratic thing, some investors might opt for Actis
over CFR. The PIC wants Adcock to remain listed - which it seems it would in some form under Actis'
offer. Equally, asset manager Oasis, which owns 2.3%, says it won't support CFR's bid because it
doesn't want shares in a Chilean company that has lower profit margins, a lower return on equity
and more debt than Adcock.
“Until Adcock's board decides it wants to be transparent with the people who actually own their
company, the terms of these offers are just conjecture. Until then, who can say if CFR's offer is
really first prize, or whether Adcock's board is just protecting an underperforming management
team, rather than looking out for shareholders”.
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